Financial Matters
With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com
Understanding your limited company UK limited company formations have continued unabated throughout the year. However, despite its continued growth there continues to be some recurring misunderstanding of several key elements of this business structure. At the formation stage there is a misunderstanding between directors and shareholders. During the operational phase one often finds a misunderstanding relating to the withdrawal of money from a limited company.
Shareholders
is not uncommon to hear individuals state “it’s my company.” More devastating is listening to sole shareholder-director companies who operate their limited company as a personal “piggy bank”. These individuals operate on the misconception that they can readily move funds between the company bank account and their personal bank account because it’s their company. Behaviour they would not undertake if they were employed in another company. Salary and dividend are the two most used methods used to withdraw funds from companies. However, these withdrawals are undertaken by different classes of company stakeholders although it may be same individual.
Salary
The company shareholders are the individuals A salary is the periodic payment to an employee who are the legal owners of a limited company. or officer of a company. Furthermore for a salary Their ownership arises from the shareholders’ payments to be made by company, a payroll purchase of company system must be in place. shares either at formation The payroll system stage or later during "...shareholders are not entitled to facilitates the statutory the life of the limited remuneration from the company payroll deductions and company. It is suffice unless a profit has been generated..." reporting to HMRC. to state at this stage that shareholders are Dividends not entitled to remuneration from the company Unlike salaries, dividends are remunerations unless a profit has been generated and the board paid to shareholders. Dividends cannot be paid agrees to make a distribution. unless the company has a distributable profit. This is not synonymous with cash in the company Directors bank account. To determine the existence of Directors are the officers of the company who distributable profits it is necessary to prepare undertake the operational work on behalf of the financial statements for the period. The existence shareholders. Directors do not own the company. of companies with a sole director-shareholder has The only exception is in the case of sole owner given rise to the salary or dividend remuneration companies or small companies where the fallacy. shareholders and the directors are often the same Why? Prima facie it appears as though individuals. However, not all small companies an individual is choosing their combination of have shareholders who are also directors. periodic remuneration. However, what is actually The blurring of the lines between these two being played out is the payment of salary to groups may be attributable to the explosion in an employed director and dividends being recent years of sole owner limited companies. It is distributed to a shareholder. The key take-away necessary to recognise that it is not the individual is the same individual is being remunerated but that is important but the position or role played wearing different company stakeholder hats. within the company. A limited company may be easy to form but A key operational challenge for small its understanding and management may be a far companies, especially single person companies is the extraction of money from the company. It cry from easy. 24 | SE21 - November 2020
